Investment firms’ agriculture venture a welcome move

June 10, 2008

Editorial

The New York Times reports that in light of the world food crisis, large private investment funds around the world are going beyond placing bets on agricultural commodities like corn, wheat, soybeans and the like.

Several are buying farmland, fertilizer, grain elevators, barges and ships. They figure that although the current run-up in food prices is partially due to one-time or possibly fleeting factors, like drought and biofuel subsidies, the long-term demand for food is likely to rise, which presents an investment opportunity.

Thus the BlackRock fund group plans to invest hundreds of millions of dollars in farmland in sub-Saharan Africa and in England. Whitebox Advisors in Minneapolis has bought several large grain elevator complexes and plans to expand them, as has Ospraie Special Opportunity Fund.

Emergent Asset Management, based near London, is buying land in Africa. A division of Louis Dreyfus Commodities is buying tens of thousands of acres of farmland in Brazil.These investors all hope that by consolidating smaller plots and introducing modern machinery and technology, they will be able to boost production and reap the profit.

The Times reporter managed to track down several people who worry about this trend. Institutional investors might not be committed to staying with farming in bad times as well as good. They might hold grain off markets in their elevators hoping prices will rise rather than increasing effective supply. Farming could become more volatile as a business. Farmland could become subject to speculative bubbles.

All these potential caveats are worth considering, but overall this is a healthy trend — the self-correcting response of a marketplace, carried out by entrepreneurs who see opportunities when others see doom and gloom.

If their investments work out, these entrepreneurs will realize significant profit, the world supply of food will increase, and agricultural prices will stabilize and probably begin to decline.

It is significant to note that these investment funds are using their own money (or money for which they have a fiduciary responsibility). If they are successful they will profit, and in the process will provide additional food for people around the world. If they are not successful, they will suffer losses. It’s the standard entrepreneurial model: Find a need and fill it.

Private investment in developing countries is also likely to put pressure on governments to open their countries further to investment, to better respect private property and to move toward rule of law rather than political whim in setting policies.

This is the best long-term, sustainable approach to agricultural development. Food aid can help in an emergency, but higher production is the long-run solution. For that you need more open markets.

We’re inclined to think these investments are probably good bets. The drought in Australia that has been a big contributor to food shortages is unlikely to last forever, and biofuel programs like ethanol mandates in the U.S. and Western Europe can be changed or abandoned (though we suspect politicians will be too stubborn to do so).

But economic growth in China and India that has created more demand for more higher-quality food, another huge factor driving up food prices, might level off but is unlikely to end.

If these turn out to be unwise investments, however, it will be the investors who suffer, not the general run of taxpayers, as is the case when governments take money seized through taxation and put it into ventures that don’t work out or become hopeless money pits.